Failed South Texas bank destroyed promissory notes in unusual turn

Before it was closed in September 2013, Edinburg-based First National Bank operated this branch at 1800 W. Commerce St. in San Antonio.

Photo: William Luther /San Antonio Express-News

It’s been more than three years since First National Bank of Edinburg was shut down by federal bank regulators, but some of its peculiar business practices continue to stir up trouble.

Prior to its September 2013 closure, the bank “made a policy decision to electronically scan and then destroy” some or all unsecured promissory notes “to save room in (its) vault for secured notes.” Unsecured promissory notes are loans based solely on the borrower’s creditworthiness, not backed by collateral like a home or car.

The revelation came out last year in a lawsuit filed by Dallas-based PlainsCapital Bank. It acquired most of the assets of First National with its closure and was trying to collect on two unpaid loans made to Michael James Rogers, the brother of former First National Chairman David Rogers Jr. This week, a federal judge in McAllen ordered Michael Rogers to pay PlainsCapital more than $2.5 million in principal and interest.

Mark Weitz, an Austin attorney representing Michael Rogers, said he doesn’t believe First National officials were trying to do any favors for his client by destroying the notes.

“If you look at the (court) pleadings, it wasn’t just Michael’s stuff that got destroyed,” Weitz said. “They wholesale destroyed a bunch of stuff.”

Weitz added, “As the black cloud of doom began to shroud itself across that bank, I think (bank officials) began to take steps to protect themselves. It’s speculation, but it’s my opinion.”

Saul Ortega, who was First National’s chairman and CEO at the time of its closure, did not respond to a request for comment.

The closure of First National, at one time Texas’ 12th largest bank with more than $3 billion in assets and four San Antonio branches, cost the Federal Deposit Insurance Corp.’s deposit insurance fund $637.5 million. This summer, former First National officers and directors agreed to collectively pay $1.5 million to settle claims made by the FDIC.

First National’s failure came a year shy of its 80th anniversary. In its last years, the bank was plagued by mounting losses, dwindling capital and legal problems.

A 2014 report on the bank’s failure by the Treasury Department’s Office of Inspector General cited its “aggressive growth,” resulting in a high concentration of real estate loans, as well as “undue influence” by ex-Chairman David Rogers Jr. and deficient oversight by management and board.

After the bank’s closure, FDIC investigators discovered that First National arranged loans for borrowers to buy stock in the institution’s holding company as a way to boost the bank’s capital levels, according to the report. Federal regulations governing insured depository institutions bar them from making any loans on their stock.

Other questionable practices raised in the report included attempts by banks officials to pass off bad loans as good and delaying recognition of problem loans.

According to PlainsCapital’s lawsuit, Michael Rogers received a $750,000 unsecured loan in December 2002. The following month, Rogers received a second loan for $1.25 million that was secured by a CD.

The first loan was renewed nine times, while the second loan — which subsequently became unsecured — was renewed 10 times, the lawsuit stated.

Some of the renewals occurred when First National was under a consent order from the Office of the Comptroller of the Currency that directed the bank to address its “unsafe and unsound practices.”

Some local bank representatives found it strange that First National would have destroyed original unsecured promissory notes.

“We keep our original notes and our collateral documents in safe keeping under lock and key,” said J. Bruce Bugg Jr., chairman of The Bank of San Antonio. “Best practice is to keep your original notes even though the law was changed to allow imaged documents in the event of a claim of forgery. You have a much higher defense against a claim of forgery if you can produce the original.”

PlainsCapital originally sued Michael Rogers in December 2013 in Hidalgo County District Court to collect on the two loans. But after the judge ruled against PlainsCapital, it dropped the suit and filed a similar complaint in U.S District Court in McAllen, Weitz said.

Steven Shaver, a lawyer for PlainsCapital, said he could not comment on the suit without the bank’s permission.

In its complaint, PlainsCapital said the only evidence of Michael Rogers’ notes are two electronic documents. “Interestingly, it appears Rogers was aware that the two notes had been destroyed,” the bank said in the lawsuit.

Destruction of the notes weakened PlainsCapital’s legal claim against Rogers and forced the bank into a three-year legal battle, the bank argued in court documents. U.S. District Judge Randy Crane finally ruled in favor of PlainsCapital Wednesday, ordering Rogers to pay more than $2.5 million to the bank. His lawyer Weitz said Rogers intends to appeal the ruling.